Fannie, Freddie Regulator Says Principal Reductions Would Benefit Banks

The federal regulator of Fannie Mae and Freddie Mac is arguing that principal reductions for home loans would benefit the banks that hold secondary debt while weakening the mortgage giants' finances.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said reducing the first mortgages would mean secondary liens held by banks would more likely be paid off.

“Doing principal forgiveness is what would protect the big banks, DeMarco told the Financial Times.

DeMarco has long resisted principal reductions, which he said run counter to his mission of minimizing Fannie and Freddie's losses, which are passed along to the taxpayer. The mortgage giants have received more than $180 billion to remain solvent since a government takeover at the height of the financial crisis in 2008.

DeMarco told the New York Times, however, that he'd be open to such principal reductions if Congress passed a law allowing them.

A slew of politicians and officials from the Federal Reserve have called for principal reductions, arguing the move would provide much-needed relief to homeowners.

NPR and ProPublica said a report from the FHFA suggested principal reductions would save Fannie and Freddie money in the long run, as homeowners would stay in their homes longer and continue to pay off their mortgages.

The bulk of Fannie and Freddie's homeowner relief has come through loan modifications, which reduce monthly payments for borrowers. Since 2008, Fannie and Freddie have provided 1.1 million loan modifications, and the two companies' mortgage portfolios have seen fewer seriously delinquent mortgages compared to those owned by banks.